HSBC top brass expected to be grilled on numbers behind decision to stay put in the UK

Bank likely to miss its target of 10 per cent return on equity in 2015

PUBLISHED : Thursday, 18 February, 2016, 3:58pm
UPDATED : Thursday, 18 February, 2016, 11:02pm

HSBC’s top executives can expect to face questions at Monday’s results briefing on the costs to the bank of its decision to keep its headquarters in London.

Analysts also said one big question was what uncertainty in the British and European regulatory environment would mean for HSBC’s bottom line.

“What drove HSBC in looking for an alternative headquarters in the first place was the aggressive tax policies in Britain,” said Wan Li, banking analyst at Bocom International in Beijing.

“Hong Kong was given a look as a potential place to move to in order to save costs. In the end, it should be a net-cost decision.”

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With the bank likely to miss its target of 10 per cent return on equity in 2015, the issues of tax and capital requirement costs could come to the fore in investors’ thinking.

Over the past five years, HSBC has been paying ever-higher levies to the British government, from just under US$600 million in 2011 to about US$900 million in 2013 and then to an estimated US$1.5 billion for 2015.

For now, HSBC has struck a deal with the British government that only 8 per cent of its profit will be liable for tax in 2016, with no offset against the country’s corporation tax.

Despite this, however, the bank will still face other costs in the wake of the 2011 Vickers report that called for lenders to ringfence their retail businesses from their investment banking arms.

“This de facto confers higher capital requirements relative to its international peers,” said Ian Gordon, head of bank research at ­Investec.

“The ‘concessions’ granted by the [British government] are inadequate – it is a burden and a high price to pay for a bank to compete effectively in international markets, especially in Asia.”

He added that HSBC would now remain liable to a British bank levy on its global balance sheet until at least 2021.

Among 40 analysts polled by Thomson Reuters, most believe HSBC will miss its return on equity target in 2015, with an average of the forecasts standing at 8.7 per cent.

Analysts also believe the significant drop in the group’s trading income, which started in the third quarter, will add up to a 39.2 per cent year-on-year decline in 2015 to US$8.2 billion. Fee and commission income will also shrink by 54.2 per cent to US$14.6 billion.

The end result will be a 4.8 per cent gain in revenue in 2015 to US$60 billion and a pre-tax profit of US$21.8 billion.

The ‘concessions’ granted by the [British government] are inadequate
Ian Gordon, head of bank research, ­Investec

In 2014, pre-tax profit was US$18.7 billion. The bank earns 60 per cent of its profits in the Asia-Pacific region.

“There is a lot of revenue risk to the stock,” said Chintan Joshi, co-head of European bank research at Nomura International, who predicts a return on equity of 9.7 per cent, just short of the target.

Sabine Bauer, senior director, financial institutions, at Fitch Ratings, said the bank might announce progress over the breakup of its structure in Britain at the meeting.

She said it might also explain how it planned to distribute across its businesses the burden of meeting the new total loss­-absorbing capacity requirement – a cash cushion top global banks must keep ­in case of future financial problems.

HSBC’s Hong Kong subsidiary would likely bear the brunt of the extra costs, Bauer said.

Some analysts had put the cost of moving from London at as high as US$2.5 billion, a hefty amount unless there were clear tax and regulatory advantages.